[Practical Finance] Reduced Monthly Interest by 100,000 Won... Should You Apply for the Interest Rate Reduction Request?

[Asia Economy Reporters Buaeri and Kwon Hyunji] #KakaoBank customer Mr. A repaid a 30 million KRW loan from the secondary financial sector last year using a loan from KakaoBank. As non-bank loans decreased, Mr. A's credit score jumped by more than 100 points. With the improved credit score, Mr. A applied for a rate reduction request through the KakaoBank mobile app, citing the credit score increase, and reduced his loan interest rate by more than 4 percentage points. The interest Mr. A saved amounted to 100,000 KRW per month, which translates to 1.2 million KRW annually.

Flood of Interest Rate Reduction Requests at Internet Banks

As inflation rises and loan interest burdens increase, household life has become tougher, leading to growing interest in the right to request interest rate reductions. This right allows borrowers to ask banks to lower interest rates if their financial status has improved since the loan was taken, such as through increased income, assets, or creditworthiness. Recently, cases benefiting from this right have frequently emerged, especially at internet-only banks, causing a sharp increase in the number of applications.

According to KakaoBank, the total number of interest rate reduction requests last year was 1,026,000, nearly doubling from 541,000 the previous year. In the case of internet-only banks, customers who refinanced from secondary financial institutions like savings banks have seen their credit scores rise, increasing the number of cases benefiting from interest rate reduction requests. The situation at Toss Bank is similar. Last year, Toss Bank received 189,000 interest rate reduction requests, which is 2.3 times the average number of requests (about 80,000) received by the five major commercial banks. Toss Bank reported that customers eligible for rate reductions enjoyed an average interest rate cut of 0.8 percentage points. K Bank also saw nearly double the number of interest rate reduction requests last year compared to the previous year.

Although the acceptance rate for interest rate reduction requests has not yet been publicly disclosed, insiders at internet-only banks say it has significantly increased compared to 2021. An insider from an internet-only bank explained, "During the high-interest period last year, we refined the evaluation of interest rate reduction requests, which greatly increased the acceptance rate."

Financial Supervisory Service Improves Disclosure of Interest Rate Reduction Requests

However, there are criticisms that the interest rate reduction request system is still not active among commercial banks and high-credit borrowers. The passive attitude of commercial banks also plays a role. From the banks' perspective, interest rate reduction requests can lead to reduced profits, so there is little incentive to proactively promote them. Moreover, the requests are more likely to be accepted only if the borrower's credit score has significantly improved, and even if promoted, if the salary increase rate is low, the request may be rejected, so the system is not yet felt by general financial consumers.

A commercial bank official explained, "Each bank has a different internal credit evaluation model, and they consider the borrower's overall financial status beyond income, so there is no exact standard." Also, high-credit borrowers who already received the lowest interest rates have little room for further reductions even if their financial status improves.

In response, the Financial Supervisory Service (FSS) has taken steps to activate the interest rate reduction request system. The FSS plans to disclose, possibly as early as this month, how much banks have lowered interest rates by accepting customers' requests. The aim is to enhance the system's effectiveness and encourage active participation from banks.

Although interest rate reduction requests have been disclosed before, only the number of applications, acceptances, interest reductions, and acceptance rates were made public. The FSS plans to additionally disclose the rate of non-face-to-face applications. It also plans to disclose the average interest rate reduction amount resulting from accepted requests to supplement the current disclosure focused on the number of cases. The disclosure scope will be expanded by categorizing acceptance rates by households and businesses, as well as by credit, collateral, and mortgage loans.

A financial industry insider said, "With deposit interest rates also low, reducing interest payments is seen as a major financial strategy, so interest rate reduction requests are becoming more active. If disclosure improves, banks will have no choice but to pay more attention to accepting these requests."